The present invention relates to generating and processing lending and borrowing transactions and more particularly, but not exclusively to a system and a method for generating and processing lending and borrowing transactions by means of matching between borrowers and lenders.
Borrowed money is a primary source of capital for both businesses and consumers. Banks and other financial institutions are the primary facilitators, bridging between lenders and borrowers, managing risks and collecting fees in the process.
Banks borrow money from depositors through certificates of deposit, checking accounts, money market accounts and other debt instruments. Depositors lend their money to the bank against the bank's balance sheet, relying partly on government insurance (such as the Federal Deposit Insurance Corporation—FDIC) and government regulation. The bank, in turn, lends this money to both business and consumers. It is the bank's responsibility to assess the lending risk, to verify collaterals, to manage the flow of funds and to take action in cases of delinquency by borrowers. No direct contractual relationship exits between the original lenders and the eventual borrowers who receive the money from the bank.
Governments, Government Agencies and commercial enterprises routinely issue bonds and other debt instruments. With the exception of government issued debt instruments, such securities carry the credit risk of the issuers, are relatively liquid (say, traded at various exchanges), and have preset maturity schedules (the schedules of repayments by dates and amounts), and prepayment options. Bonds are usually issued with respect to large sums of money.
Banks and other financial institutions package and sell many other forms of debt securities and debt derivatives. In essence, in these packages, a number of loans (each with its terms and conditions and risks profile) are owned by a single entity, whose securities (debt or equity) are directly linked to the risks and the performance of the loans or derivatives owned by the entity. There is no direct contractual relationship between the securities holders of such entity and the borrowers who receive the packaged loans.
Micro-Lending, within and outside the traditional banking sector, involves lending of relatively small amounts (typically less than $25,000), to micro entities (individuals or organizations) who lack the collateral or the capacity to convince traditional banks that they are able to repay a loan, and are therefore considered a risky client group. Micro entities frequently have limited track record or financial reporting capacity. The costs of processing small loans and the risks involved in lending to micro entities make financial institutions hesitant to develop services for micro entities and small time entrepreneurs. All these factors limit the access to credit available for micro entities.
There are key differences in the service delivery principles of micro-versus traditional lending. Micro lending is characterized by its small loan size, the non-traditional aspects of collateral requirements and assessment of credit worthiness, and quick and easy access. The relatively high transaction costs of micro-lending are covered either through above market level interest rates or subsidies. No direct contractual relationship exits between the sources of capital used by the micro-lenders and the eventual micro-borrowers who receive the money.
Financial exchanges allow buyers and sellers to trade various types of securities (stocks, bonds, futures, options). Taking orders from both buyers and sellers, these exchanges match sell or buy orders for individual securities based on price and quantity, to generate trades.
With the rise of the Internet, and the growth of e-commerce, a new breed of exchanges, i.e. electronic marketplaces, has developed. These marketplaces, used mainly as auctions for trading goods, are either Consumer-to-Consumer (C2C) marketplaces (such as eBay™), Business-to-Business service providers (B2B) (such as Fiber2fashion™), or Business-to-Consumer (B2C) service providers (such as Yahoo.com™).
Currently, there are a few electronic market lending places. For example, Prosper Marketplace Inc. offers an electronic marketplace where borrowers may organize in a group, for negotiating better loan rates for the group.
In another example, Zopa Ltd. offers a web site where lenders may define the minimum required credit rating of the borrowers (according to a single rating agency) and the desired interest rate. Only borrowers rated by the single rating agency may choose to agree to the loan terms. The funding offered by the lender under the loan terms is arbitrarily divided between the borrowers that meet a specific credit rate, such that each borrower is allocated a small chunk of the funding (less than 1/50).
Both financial exchanges and electronic marketplaces implement one or more auction mechanisms to match buy orders and sell orders, for generating transactions. An auction is defined as any negotiation mechanism that is: mediated, well-specified (i.e., runs according to explicit rules) and market-based (i.e., determines an exchange in terms of standard currency).
Auctions can be either single dimensional—where the only bid dimensions are price and quantity of a single good, or multi-dimensional—where other attributes of the goods are also negotiated. For example, if the goods are loans, the other attributes may include the collaterals offered by the borrowers. Single dimensional auctions can be further subdivided into one-sided auctions and two-sided auctions.
Two-sided auctions include the Continuous Double Auction (CDA) and Call Market (periodic clear) types described herein below.
Two-sided auctions form the basis of many of today's financial exchanges. For example, NASDAQ has a Continuous Double Auction process, in which every new order is matched immediately if possible, and the remaining orders are put on the order book. The Arizona Stock Exchange (AZX) operates a Call Market (“periodic clear”) in which orders are matched periodically.
Multi-dimensional auctions include multi-attribute (matching a single good with multiple attributes) and multi-good mechanisms.
An auction operator performs three types of activities: receiving bids, disseminating information and arranging trades (clearing). Therefore, in analyzing the different types of auctions, one can use three dimensions: bidding rules, clearing policy and information revelation policy.
Current systems and methods for processing lending and borrowing transactions have several disadvantages.
Businesses and consumers commonly borrow at local banks or financial institutions having specific knowledge and information about the local market, the community and often the individual borrowers.
The emergence of credit reporting agencies and the Internet have broadened the access to such information, but have not eliminated the trust and long-term relationships aspects of lending and borrowing decisions. Lenders without local presence have only limited direct access to local borrowers. Similarly, borrowers are limited in their access to lenders without local presence.
The banking system is characterized by high costs. The high costs include both fixed costs, such as: fixed assets (branch offices, distributed IT infrastructure, etc.), and variable costs of operation, which include required capital reserves expensive workforce, information systems services, insurance, and regulatory costs.
The costs include both operational costs (bank branch operation costs, salaries, providing local physical points of service to the public), and financial costs associated with the fact that banks need to hold reserves that cover the risk associated with the fact that the bank is a part of the transaction
The high costs are reflected by a large spread between the interest rates paid to lenders and those collected from borrowers.
The fact that the loan market is characterized by a limited number of mega banks and financial institutions using a limited number of lending policies, limits the options available to a specific borrower based on his unique circumstances.
Most banks and lending institutions utilize a limited number of inflexible lending processes. The limited and inflexible processes prevent a potentially major increase in the number of lenders able to manage their risk in a different way, which would have resulted, had there been more flexible lending processes available.
More flexible lending processes may create higher yield for the lenders and more options for the borrowers. (i.e., a partial advance against the total amount of the loan before verifying the collaterals, a lower interest rate in return for a portion of the borrower's earning from a particular activity, additional means of payment such as bartered services, etc.).
Currently, lending institutions, banks, and other financial institutions deal with very limited and finite number and types of risk profiles. Consequently, the financial institutions lack the ability to address very specific situations that current risk profiles fail to address. Different lenders may have different subjective risk assessment of the same borrower. For example lending to a Chinese borrower may be deemed safe for one lender and too risky to another lender. More opportunities will be available if many borrowers and lenders participate in a large market where each of them can find what he considers the best deal.
Borrowers of small amounts from thousands of Dollars to a few Million Dollars are limited in their ability to issue public debt securities. Even if they can issue such securities, the cost may be prohibitively high and the regulatory requirements may be complex. For example, there is a need to meet the Sarbanes-Oxley (SOX) requirements. Sarbanes-Oxley (SOX) is a US law which was passed in 2002, and aims at strengthening corporate governance and restoring investor's confidence.
Consumers and many businesses invest their short term cash surpluses in low interest money market accounts because they do not have a better way to maximize their gain from small amounts available for relatively short periods.
The public market for small debt issues is very limited and illiquid and there is almost no market for non-public debt issues.
Currently, lenders lack the ability to leverage their knowledge or assessments in lending to particular industries, geographies, or other profiles of entities. That as to say, the lenders have to trust a bank or another financial institution to make the decisions that are reflected in the interest rate available to them. The interest rate is based on average costs and risks across a very big loan portfolio of the bank in general, rather than a target subpopulation of borrowers the lenders are willing to finance.
Current lending processes represent cumbersome, inefficient and costly processes that were appropriate in the past. The processes fail to weigh together the needs of borrowers, lenders, and other parties involved in the lending process. Current lenders and borrowers face a rather limited number of choices, with regards to the lenders/borrowers, lending/borrowing support services—which are limited to traditional banking systems, etc.
There is thus a widely recognized need for, and it would be highly advantageous to have, a system and a method, devoid of the above limitations.